Disclosing foreign assets is already a delicate situation for a taxpayer. There might also be other liabilities to consider when making this decision, such as unreported domestic taxes or the number of years that the government needs to examine. An experienced offshore disclosure attorney could provide you with the information you need to do this carefully.
When someone wants to file an offshore disclosure, they will need to file their tax return as well. However, amending one return with the IRS often requires having to fix everything. A local lawyer can usually help with these other liabilities at the same time they make their offshore disclosure.
The taxpayer may have failed to file a K1 (Form 1065) or report on interest income from the U.S., claiming it was an oversight. They are usually able to amend the returns to include domestic income as well, although the procedures will be different and they do not come with the large penalties that are usually reserved for international income. Depending on which program a taxpayer is utilizing, some of these domestic penalties could be abated.
The period that disclosure stretches back to will depend on the program or procedure that the taxpayer chooses to go forward with. In most cases, the answer is six years, although some require as little as three.
There are several different types of disclosures but one of the more common programs for non-willful taxpayers is the streamline program, which comes in two forms. There is the streamlined foreign offshore procedure that is for taxpayers residing outside of the United States, and streamline domestic offshore procedure for taxpayers who reside within the United States. The streamline procedure discloses three years of amended 1040s with all the related international information forms, along with the past six years of FBARs.
Another disclosure option would be the delinquent FBAR submission procedure for those who already reported the foreign income and filed the Form 8938 with their tax returns, and all they have is just FBARs that may have been overlooked. That comes with a six-year lookback period. The FBARs go to the Treasury Department, and the Forms 1040 and 8938 go to the IRS directly.
The delinquent international information submission procedure was used by people who did not file the international information forms like the 8938 and 3520. Typically, a taxpayer could file them for the last six years and they would incur no penalties if they provided reasonable cause. In November of 2020, the IRS changed this procedure. Now the IRS may process them without looking at reasonable cause and can automatically assess the penalty. By doing that, the IRS has basically removed the delinquent international information submission procedure as a viable route to reduce penalties.
The other, more serious, disclosure that could be made is a voluntary disclosure, which looks back six years. A voluntary disclosure is not necessarily always an offshore disclosure, since it covers the domestic disclosures too. The Offshore Voluntary Disclosure Program formally ended on September 28, 2018.
The IRS guidelines dictate that someone who files their disclosure needs to include the payment owed, depending on the program they are using. These disclosures are for individuals with foreign bank accounts that were not previously reported to the government. Those individuals can liquidate a portion of that account in order to make the payment. Thus, the inability to pay is not generally a liability for someone in Washington DC who wants to disclosure their offshore assets.
In rare cases, they may have already spent the money in their account by the time they file a disclosure. It then becomes a case-by-case basis as to whether someone will want to make a disclosure without the payment, but generally speaking, they are required to pay. There is no penalty for failing to include the payment and the voluntary disclosure requires only a good-faith effort to pay, which allows some wiggle room. If the taxpayer wanted to use one of the other programs but could not pay their tax bill, they might have to look into other options.
Do not let the inability to pay or the existence of other unreported information prevent you from correcting your tax obligations. Contact a legal professional to discuss potential liabilities with your offshore disclosure in Washington DC.